The Blue Ocean Strategy

Indian bus service industry was extremely unorganized till recently before redBus emerged and took the industry by its neck and brought a sort of revolution never imagined for such an unorganized industry. This was primarily because the information flow and availability in this industry was very difficult and there was a lot of mismatch. The bus ticket industry was highly fragmented with small players active regionally. All these were small small agents competing against each other. Due to lack of any major player there was not much competition for redBus and hence it was able to create a marketspace for itself through entering the bus ticket industry online. By the time redBus entered the horizon there were settled names both in airline and railway ticket booking industry who were operating online. But even for them it was a huge task to enter bus ticketing industry due to the sheer complexity present in the industry and emulating the online model for bus ticketing industry was perceived to be almost impossible even by these major players in e-commerce. This study deals with how a disruptive model can change the scenario of the complete industry. redBus which at the time of its inception was confined in a small flat of 2 rooms is now a 400 million company with over 400 employees and offices across India. Currently it is the only major player concentrating completely on bus ticketing industry with a market share of over 70%. In this research, I have tried to analyze the bus ticketing industry and how redBus identified the opportunities present in this segment and created a value chain which not only gave them a distinct product but also at competitive cost. It is a perfect example of Blue Ocean strategy where entry of redBus changed the entire landscape of the industry. It revolutionized the way the people buy bus tickets in India. One of the unique bus ticketing system of its kind in the entire world, competitors have leaped in this market but none has received success like redBus. This study further covers how redBus has sustained its competitive advantages and what are the challenges and growth opportunities going forward.

CHAPTER-1 INTRODUCTION: Blue Ocean Strategy

As the authors of the book Blue Ocean Strategy, W. Kim Chan and Renee Mauborgne say: Although the term blue ocean is new, their existence is not. They have been a part of business transformation in past as well as in present. If we look back in the past say a century ago, How many of today’s industries were then known? The answer will be majority of today’s industries were unknown in their current form. Many industries such as automobiles, aviation, health care, and management consulting were unknown or were just beginning to emerge. Now lets look at the industries 3 decades back. Again, multibillion-dollar industries like mutual funds, computers, mobile phones, smart phones, gas based power plants, discount retail, biotechnology, nanotechnology, express parcel delivery, coffee bars, video games, home videos, and CD player and many other such industries were all non-existent in a practical or popular way.

Similarly, lets turn the clock forward a bit and try to look into the future. Lets say after 30 years or say 50 years how many of the now unknown industries will emerge and will exist. If history is any indicator of things to come in future, the answer is there will be many such industries that we cant even think of right now which will emerge.

This is the reality; industries are dynamic. They never remain the same over a long period of time. They change continuously and evolve. The participants, the process, the market and the operations everything changes. Operations improve, markets evolve and grow, and non-customers become customers. History tells us that we have huge potential to change the existing industries and recreate them and not only that it teaches us that we underestimate our capability to create new ones. To have an idea of how dynamic things can get, the 50-year old Standard Industrial Classification (SIC) system, which was published by the U.S. Census, was substituted by the North America Industry Classification Standard (NAICS) system in 1997. The reason being the number of industry sectors that SIC covered were half the number of sectors that actually existed in 1997. The old SIC system covered only 10 industry sectors. The new NAICS system doubled it to twenty sectors to reflect the emergence of new-age industries. For example earlier the service sector included all that is now fragmented into different specialized industries like IT, healthcare, social assistance, etc. Given that these systems are made to ensure stability, continuity and for keeping standards, such a substitution shows the significance of growth of Blue Ocean industries.

Yet the dominant emphasis of strategists has been on competitive strategies also known as red ocean strategies. Part of the explanation for this is that its roots in military strategy heavily influence corporate strategy. Strategy is about fighting different competitors over the same area of land that is constant and not unlimited. Unlike battles though, the history of industry tells us that the universe of market is unlimited and there is a place for everyone; rather, blue oceans have been always in existence. They have continuously been created. To believe and restrict oneself to red ocean is therefore to accept the constraints that are associated with war-limited piece of land and the need to fight and defeat an opponent to succeed-and to reject the unique strength of the business world: the capacity to create new market universe that is uncontested.

Blue Ocean v/s Competitive Strategy (Red Ocean)

Blue Ocean emphasises the importance of value innovation that can completely negate the competition replacing ‘competitive advantage’ with ‘value innovation’ as the firm’s primary goal thus highlighting the importance of creating demand and exploiting untapped maket rather than risking competition.

There is a debate in the academia and research groups as to which strategy is better suited but all evidences are as case studies on different companies which is not enough to define any one of the two strategies as a clear winner. Rather the two strategies co-exist and should co-exist because a firm on the foundation of Blue Ocean strategy may ultimately have to face competition depending on the imitability of the business model and then before they have more value innovation to differentiate themselves and still remain cost competitive, they must also have a competitive strategy to ensure they do not fall behind of competition.

Research results of researchers like Andrew Burke Andres van Stel and Roy Thurik suggest that the notion that blue ocean makes competition irrelevant may not be true.

When combined, the two provide a more holistic and realistic depiction of economic performance. Thus, in real life the any strategy must be adopted after evaluating the business and market circumstances appropriately as these define the degree of scope for effectiveness of either Blue Ocean or competitive strategy. Furthermore, what emphasis and mix should be given to either form of strategy across short and long-term time horizons is apparent in most innovative companies competing in short term red oceans while significant time and resources are devoted to the long-term goal of developing innovation that creates consumer demand and new markets.

Figure 1: Red Ocean v/s Blue Ocean Strategy

Source: www.blueoceanstrategy.corporatestrategy.com

Blue Ocean and White Space

The term white space has been used in business parlance to mean uncharted territory or an underserved market. But as Mark W. Johnson perfectly writes in “Seizing the White Space” the term is the range of potential activities not defined or addressed by the company’s current business model, that is, the opportunities outside its core and beyond its adjacencies that require a different business model to exploit. White space is a subjective valuation: one company’s white space may be another company’s core.

What matters is that it describes activities that lie far outside a firm’s usual way of working and presents a series of unique and perplexing challenges to that organization. It’s an area where, relatively speaking, assumptions are high and knowledge is low, the opposite of conditions in the company’s core space.

The chance to seize a piece of white space presents a tantalizing opportunity. Success here can bring the transformational growth that so many business leaders seek. Yet understandably, a play for the white space feels risky, and often the numbers don’t appear to add up. The market seems too foreign, or core capabilities won’t apply. Some executives, having made one unsuccessful foray, just won’t risk failing again.

Figure 2: White Space

Source: Seizing the White Space, Mark W. Johnson

Blue Ocean Strategy and Applied Concepts

The Strategy Canvas

The strategy canvas is the central diagnostic and action framework for building a compelling blue ocean strategy. The horizontal axis captures the range of factors that the industry competes on and invests in, while the vertical axis captures the offering level that buyers receive across these entire key competing factors.

There are two purposes that are served here:

It captures the current state of play in known market space, which allows users to clearly see the factors that the industry competes on and where the competition currently invests.

Then, it propels users to action by reorienting focus from competitors to alternatives and from customers to non-customers of the industry.

The value curve is the basic component of the strategy canvas. It is a graphic depiction of a company’s relative performance across its industry’s factors of competition. A strong value curve has focus, divergence as well as a compelling tagline.

Figure 3: The Strategy Canvas

Four Action Framework

This framework can also be referred to as the Eliminate-Reduce-Raise-Create Grid. To reconstruct buyer value elements in crafting a new value curve, we use the Four Actions Framework. As shown in the diagram, to break the trade-off between differentiation and low cost and to create a new value curve, the framework poses four key questions to challenge an industry’s strategic logic and business model.

Which of the factors that the industry takes for granted should be eliminated?

Which factors should be reduced well below the industry’s standard?

Which factors should be raised well above the industry’s standard?

Which factors should be created that the industry has never offered?

Figure 4: Four Actions Framework

By pursuing the first two questions managers gain insight into how to drop their cost structure vis-à-vis competitors. Rarely do they systematically set out to eliminate and reduce their investments in factors that an industry competes on. The result is mounting cost structures and complex business models. The other questions provide insights into how to lift buyer value and create new demand. Collectively, they allow exploring how to reconstruct buyer value elements across alternative industries to offer buyers an entirely new experience, while simultaneously keeping your cost structure low. Eliminating and creating are vital as they push companies to go beyond value maximization exercises with existing factors of competition. They prompt companies to change the factors themselves, hence making the existing rules of competition irrelevant.

Plan-Do-Check-Act (PDCA)

The PDCA Cycle is a checklist of the four stages, which one must go through to get from `problem-faced’ to `problem solved’.

This concept was developed by Walter Shewhart, the pioneering statistician who developed statistical process control in the Bell Laboratories in the US during the 1930’s. It was taken up and promoted very effectively from the 1950s on by the famous Quality Management authority, W. Edwards Deming. Consequently, PDCA cycle is also commonly known as `the Shewhart Cycle’ and ‘the Deming wheel’.

This cycle diagram can be applied in team meetings to take stock of what stage improvement initiatives are at, and to choose the appropriate tools to see each stage through to successful completion.

Here is what we do in each stage:

Plan to improve operations first by finding out what things are going wrong (that is identify the problems faced), and come up with ideas for solving these problems.

Do changes designed to solve the problems on a small scale first. This minimizes disruption to routine activity while testing whether the changes will work or not.

Check whether the small scale changes are achieving the desired result or not. Also, continuously Check nominated key activities (regardless of any experimentation going on) to know what the quality of the output is at all times to identify any new problems.

Act to implement changes on a larger scale if it’s successful on small scale. Also Act to involve other persons (other departments, suppliers, or customers) affected by the changes and whose cooperation is needed to implement them on a larger scale.

If the experiment was not successful, skip the Act stage and go back to the Plan stage to come up with some new ideas for solving the problem and go through the cycle again. Plan-Do-Check-Act describes the overall stages of improvement activity, but how is each stage carried out? This is where other specific quality management, or continuous improvement, tools and techniques come into play. The diagram below lists the tools and techniques that can be used to complete each stage of the PDCA Cycle.

Figure 5: PDCA Cycle

VRIO Framework

VRIO is an acronym for Value, Rarity, Imitability and Organization. This is also a 4 questions framework where one asks about a resource or capability to ascertain its competitive potential: the question of Value, the question of Rarity, the question of Imitability (Ease/Difficulty to Imitate), and the question of Organization (ability to exploit the resource or capability).

The Question of Value: “Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?”

The Question of Rarity: “Is control of the resource/capability in the hands of a relative few?”

The Question of Imitability: “Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?”

The Question of Organization: “Is the firm organized, ready, and able to exploit the resource/capability?”

The VRIO framework, in a wider scope, is part of a much larger strategic scheme of a firm. The basic strategic process that any firm goes through begins with a vision statement, and continues on through objectives, internal & external analysis, strategic choices (both business-level and corporate-level), and strategic implementation. The firm will hope that this process results in a competitive advantage in the marketplace they operate in. VRIO falls into the internal analysis step of these procedures, but is used as a framework in evaluating just about all resources and capabilities of a firm, regardless of what phase of the strategic model it falls under.

CHAPTER-2 LITERATURE REVIEW

Paper 1:

“Blue Ocean Strategy versus Competitive Strategy: Theory and Evidence.” Burke, Andrew, André van Stel, and Roy Thurik. ERIM Report Series Research in Management (May 2009)

Theme: Empirical analysis of blue ocean strategy versus competitive strategies based on data assembled from 655 retail shops through 41 shop types in the retail industry in Holland.

Summary: This paper addresses the debate surrounding Red Ocean (competitive strategy) v/s Blue Ocean (New Market) strategy. The authors note that Blue Ocean seeks to emphasise the importance of value innovation that can completely negate the competition replacing ‘competitive advantage’ with ‘value innovation’ as the firm’s primary goal thus highlighting the importance of creating demand and exploiting untapped maket rather than risking competition. This results in increased profitability in the industry.

There is a debate in the academia and research groups as to which strategy is better suited but all evidences are as case studies on different companies which is not enough to define any one of the two strategies as a clear winner. Rather the two strategies co-exist and should co-exist because a firm on the foundation of Blue Ocean strategy may ultimately have to face competition depending on the imitability of the business model and then before they have more value innovation to differentiate themselves and still remain cost competitive, they must also have a competitive strategy to ensure they do not fall behind of competition.

Research results in this paper suggest that the notion that blue ocean makes competition irrelevant may not be true. To test the superiority of either tools the authors looks at the two strategies from both long term and short term perspectives and outline a theoretical model which suggests that every market will experience new vendors arriving to share the profits that are there on the offering in the industry. Thus the composition of the pie chart of market share will continuously exhibit different set of players with some fading off while others entering the market but only until the saturation point is reached where everyone will break even. Looking at the industry an its players over a period of time in this manner will give us an understanding about whether the new market strategy or the competitive strategy is more viable for the industry. If companies succeed over a long period of time by creating value innovation (new market strategy) as the new companies entered, both the industry profits as well as the firm’s profit will grow steadily and so will the number of vendors in the strategy. On the other hand, if the profitability of the blue ocean firm went down with increasing number of vendors in the industry, it would be an indication of the dominance of the firms that followed competitive strategy over the firms that followed new market (blue ocean) strategy. After studying the complete data from 1982-2000 of 655 retail shops over 41 shop types in the Dutch retail industry and after testing and analyzing the premise the authors concluded for half the shop types, the firm profits were directly proportional to the number of firms while the blue ocean strategy was dominant over a long term with number of vendors and firm profitability rising/falling together over all shop types in the whole period under consideration. The authors also concluded that in short term Red Ocean strategies were at work.

The study highlights that the two strategies co-exist and cross each other throughout the industry life and there is no particular choice that any manager prefers.

Paper 2:

“Synthesizing a Blue Ocean.” Master Thesis. Vester, Daniel. Aalto University, 2012.

Theme: Applicability of New Market strategy frameworks and techniques in the electronic musical instruments industry for innovating new products.

Summary: In this paper, the author targets to show how value innovation could be used in case of an electronic musical instrument company to add value to their product and create new market space. To explain this, he choses to compare the traditional strategies like competitive strategy, Porter’s 5 forces strategy to the blue ocean strategy. Blue ocean strategy is eventually selected for the process of product development of ArturiaMiniBrute, an analogue synthesizer reason being

1) Its attention on constructing new uncontested market space and at the same time targeting lower cost and product differentiation as well; and

2) The ease with which the analytical tools and frameworks in a Blue Ocean strategy could be blended into the product development process and usability of the instrument thus developed.

Blue ocean strategy tools such as the Strategy Canvas, Four Action Framework, Buyer Utility Map and Three Tiers of Noncustomers are applied after quantitative analysis of sales figures in the electronic musical instrument industry for identifying Arturia’s closest competitors in various synthesizer markets and to design the strategy for ArturiaMiniBrute.

The author’s observations and interpretations show that the Blue Ocean Strategy techniques and frameworks can aid electronic musical instrument firms add value to their instruments/products/offerings and create new market space. Subsequently, the author advocates that companies should shift focus from technical features of the musical instrument to the emotional appeal of the musical instrument, and urges that companies should get out of the traditional mindset, challenge established rules of the industry by eliminating factors that have been ignored and not given due importance but which may be of great value to the customer.

Paper 3:

“The Impact of Blue Ocean Strategy in Low-cost Transport.” Å tverková, Hana, Michal ÄŒervinka, and Vlasta Humlová. In 2012 International Conference on Traffic and Transportation Engineering. Belgrade, November 29-30, 2012.

Theme: Applicability of blue ocean strategy theory to Ryanair (air transport industry)

Summary: This paper illustrates how blue ocean strategy can be vital and have an important influence in the low cost aviation sector. The authors chose to analyze the low-cost air transport industry in the European Union. They report that the market is highly competitive and the regional players fight amongst themselves on the base of cost competitiveness. The authors show that a cordial relationship between regional airports and any carrier firm can enable budget airlines to provide distinguished value for airline passengers at a low cost to the companies. The authors also suggests using the case of Ryanair that infrastructure improvement for non-core activities at the smaller airports might be essential to facilitate such relationships between budget airlines and small regional airports.

CHAPTER-3 EXAMPLES OF BLUE OCEAN STRATEGY

Air Asia

One of the major developments that the airline has experienced has been the evolution of the budget airlines. For instance, emergence of Air Asia in Malaysia is a classic example.

Air Asia have avoided the competitive strategy or the red Ocean (competition against Malaysia Airline and other airlines like Tiger Air, Jet Air and other regional airlines) by considering factors that are important to customers but easily taken for granted by most of the other airlines. With the Four Actions Framework proposed by W. Chan Kim and Renee Mauborgne, Air Asia have ensured they make Malaysia Airline, Tiger Air, Jet air and regional players irrelevant by implementing many important strategic moves explained below.

STRATEGY

Eliminate:

1) OTC booking

2) Seating Class booking arrangement

3) Free breakfast/lunch/dinner on the plane

Reduce:

1) Number of attendants serving on the plane

2) “Luxury” facilities delivered

3) Quality of the seats

Raise:

1) Increased flight hours for their aircrafts: frequency of flight

2) Selected key endpoints/destinations catered frequently

Create:

1) Booking system became online

2) Travel system: point-to-point

Through these strategic moves, Air Asia has been able to concentrate on factors that really matter for the customers like better booking channel, point-to-point travel system, etc. that makes customers’ lives simpler and adds value to them. This is a perfect example of Value Innovation, as not only does this help Air Asia increase the value to the customers but at the same time reduces cost for Air Asia significantly – Value Innovation. This also allows Air Asia towards customers who were not traditionally target thus creating a new market space and targeting non-customers in the traditional airline industry.

Current Airline Customers:

1) Corporates and business fraternity in Malaysia or ASEAN region.

2) Those individuals who can afford to buy expensive airline tickets from airlines like Malaysia Airline and other regional players.

Non-Customers:

1) Officers from the government and other government staff

2) Those individuals who cannot afford to buy expensive tickets such as students or recent graduates or lower middle class and rural people.

With effective execution of Blue Ocean strategy, Air Asia has furthered expanded their gamut and has ventured into other businesses like they started Tune Hotel and Tune Money. The model is again towards creating Blue Ocean market space.

Crocs Inc.

Company Snapshot

Crocs Inc. is one of the major players in shoe industry who have been very successful. It designs, fabricates and markets bright-colored, comfy-branded footwear and accessories for all segments men, women and children.

Blue Ocean Strategic Move

Crocs Inc. with its distinctive lightweight clogs created a blue ocean market space in the shoe industry. These types of shoes gave customers a perfect combination of comfort and fashion at an affordable price point. Crocs shoes have mass appeal because not only are they branded but also in a way they are refreshing, they are different from traditional sandals and casual shoes and add a fun element as well as they come in a wide array of bright colors which provide a funky look. Combined with their new crocodile logo on their shoes it also gives them a bold look. Crocs have been a run-away success also because they provide customer what they never even thought of, they satisfy their customers by adding value to their customers’ usage by giving features like lightweight, waterproof, ergonomic comfort and anti-microbial and anti-skid.


Success

Founded in 2002 as a new type of boat shoemaker initially, the company has grown into a global sensation in casual footwear industry with sales across the globe in over 90 countries and reaching 1 billion US dollars in 2011.

Figure 6: Crocs Four Actions to create Value Innovation

Source: Frontier Strategy, LLC

Nintendo’s Wii

The video game business has a huge market and is a multi-billion dollar industry. Video consoles, which form a big portion of this market, were very recently in the past controlled by two major players: PlayStations (PS1&2 and soon PS3) from Sony and Xbox (Xbox and Xbox360) from Microsoft. Nintendo, however, a distant third player created ripples in the market space with its launch of the Wii. This is an especially interesting case study from a strategy perspective since it’s a brilliant example of the so-called blue ocean strategy. The graphic below demonstrates Nintendo’s Wii strategy with the help of the strategy canvas and is quite clear.

Figure 7: The Strategy Canvas of Nintendo Wii

On giving a closer glance to the above graphic, one will notice that Nintendo is competing on a completely different strategic landscape as the attributes are completely differently focused for Nintendo in comparison with Sony and Microsoft. The Wii is not only affordable for general public, it has no Hard Disk, no DVD, no Dolby 5.1, weak connectivity and comparatively low processor speed, but enthralls the user by its innovative motion control stick. The stick is designed such that it integrates the movements of a player directly into the console of the video game, The user gets an interface where he gets a live feel of himself playing in the screen. With this feature Nintendo not only won the existing customers in the video game world but also brought in a completely new set of customers to the business.

We can again think of the Four Actions Framework in all of the above descriptions of features. I will explain here with a couple of those features:

Reduction in cost through elimination of some features like Hard Drive, DVD, Dolby 5.1 and low processor speed

A raise in demand by creation of motion stick: strong value innovation for new gamers/customers.

These 2 features disregard the traditional belief in competitive strategy of either going for cost leadership or product differentiation and not simultaneously for both. In other words, through this example we see that while Sony and Microsoft are fighting in the same old bloody Red Ocean of existent market, Nintendo created a new market space for itself in the form of Wii and is now sailing calmly in this Blue Ocean that it created for itself.

CHAPTER-4 BOS: A Case Study on redBus

Story of redBus

One fine evening an electrical engineer in Bangalore planned to travel to Hyderabad to celebrate Diwali with his family but the answer he got from the agents when he reached at bus stands was that all tickets were sold out and he could inquire about the availability from some other agents. Although the person got frustrated but an appalling question was making rounds in his minds; why weren’t there other methods to get bus tickets booked rather than moving from one agent to another? He questioned why can’t bus tickets be booked online like airlines and railway tickets? The person was Phanindra Sama and his frustration lead way to a revolution in Indian bus industry and redBus was born.

Phani discussed the idea with his friends (Sudhakar Pasupunuri and Charan Padmaraju) and they started working on the idea. Initially they decided to develop an IT based inventory system for bus operators but the idea was dismissed by the operators and agents as the task seemed huge to them. Meanwhile they came in contact with the Bangalore chapter of TIE (The Indus Entrepreneurs) which accepted their venture and mentored the team and guided them with various assignments pertaining to market surveys and market research. The TIE mentorship enabled redBus to get venture capitalist interested in them and a VC named Seedfund funded them with $500000. This is how redBus was born on 18th August 2006, India’s first online bus ticketing website, a concept which was in use for airline and railway booking but no one had realized that it could be feasible enough for the bus travel also. Exhibit 1 gives company details.

Exhibit 1

The Team

Major Milestones

Exhibit 2

Company Details

Bus Ticket Industry- Overview in India

The Indian bus travel industry was highly fragmented with a large number of small operators and agents having very little orientation towards technology. Most of the operators were regional players having small fleets of ten buses where few were long route players having 100 or more fleets of buses. Exhibit 2 gives the details of the industry structure.

Long route buses were known as contract carriages and their tickets were to be bought in advance whereas short haul buses known as stage carriers and their tickets were sold in the coach itself. The booking system was agent driven in which each agent had contract with three of four operators and tickets were allocated to them on the basis of quota system by the operators. Each agent used to sell its quota of tickets and all the unsold tickets were informed to the operator before some fixed time of bus departure. No centralized inventory was maintained by either the agents or by operators